What is Employee Retention Credit?
Employee Retention Credit (ERC) is a fully refundable tax credit filed against employment taxes. ERC was set up as part of the Coronavirus Aid, Relief and Economic Security Act (CARES) and was created in 2020 during the COVID-19 pandemic to help businesses recover from economic fallout that occurred. It essentially provides funding to businesses to make up for what was lost during the pandemic. Many companies will argue that the ERC has been their lifeline post-coronavirus outbreak.
Congress decided to pass the Consolidated Appropriations Act of 2021 (CAA) after realizing the initial ERC was not reaching as many businesses as originally hoped. The new goal was to reach more businesses and help more people stay employed. Credit from employment tax deposits can range from $5,000 to $21,000 per employee and is essentially a reward for companies who have kept full-time employees on payroll during the pandemic. Since government orders shaped much of what occurred as far as business restrictions, this is the government’s way of giving back to your business.
Where did it come from?
Since many businesses faced economic decline during the pandemic, the government passed ERC as an opportunity for businesses to get funded for lost revenue. It essentially encouraged employers to keep their employees on payroll, even if they were not working during COVID-19. The goal was to sustain the economy during the coronavirus pandemic. Congress decided to pass a $1.9 trillion relief bill so that businesses could benefit. The IRS predicted that 70% of businesses would claim Employee Retention Credit.
Initially, as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, not many businesses were able to qualify due to non-revenue decline. This is no longer the case. The act has since been revised so that many businesses are eligible for credit. The CARES act was passed as a $2.2 trillion economic stimulus bill. At the same time, the Families First Coronavirus Response Act was passed. Employers can qualify for both ERC and the FFCRA. Therefore, both credits will be paid out.
Throughout the last several years, ERC has undergone many changes. Most recently, in August, the IRS issued a notice that provides additional guidance when filing for ERC. Basically, the government is not trying to hide ERC from people, but instead is in an attempt to get more businesses to file so that they receive the correct credit.
What should you pay attention to?
Keep in mind that the Employee Retention Credit refund is tax exempt income on the federal tax return. If you file for ERC, you must reduce deductible wage expenses by the amount of funding you receive back. Also note that even if you are not sure if your company qualifies it’s more likely that you do. Plus, you definitely do not want to pass up extra funding for your business, especially if your business faced a decline during the COVID-19 pandemic.
The Infrastructure Investment and Jobs Act ended the ERC in November of 2021, but if eligible, your business can still apply to receive funds. Filing will lower your business’ social security tax liability. If the credit you receive is greater than your social security tax liability, you will be compensated. By taking advantage of filing, you are setting your business up for success and putting the economic downfall that the coronavirus pandemic caused behind you.
There are two main ways to be eligible for stimulus refunds:
1) Employers are eligible for ERC if they match the required decline in revenue within any quarter of 2020 or 2021.
2) Employers are eligible if they have W-2 employees.
Up to $5,000 can be credited per employee from March 13, 2020, to Dec. 31, 2020 as well as up to $21,000 per employee between the period of Jan. 1, 2021, to September 30th 30, 2021. Depending on how large your company is, you could earn up to six or seven figures back in funding. Eligibility can be determined by electing to use the immediately preceding calendar quarter.
I Received PPP – Can I Still Apply?
Businesses that received Paycheck Protection Program (PPP) funding are still eligible to file for Employee Retention Credit. In fact, ERC funds can be more than funds received from the PPP loan forgiveness. Even non-essential businesses are eligible to receive funding. Therefore, PPP loans from 2020 or 2021 do not affect a business’ eligibility.
Small employers with a number of full-time employees under 500 are eligible to receive ERC payments during the calendar quarter when wages are paid out. Part-time and seasonal employees do count as part of this number. The fewer full-time employees in your organization, however, the less funding you are eligible to receive back. Total credit is calculated based on the total number of employees.
How do I qualify?
Many industries faced decline during the pandemic. If your company’s gross receipts were 50% lower in a certain quarter than they were in the same quarter of 2019, pre-Covid-19, your business qualifies to file for ERC. Since there have been several changes within the last year regarding Employee retention Credit, many businesses are disqualifying themselves based on rumors, when in reality, they could very well qualify.
If your business has faced any of the below during 2020 or 2021, you may qualify:
- Full or partial shutdown
- Significant decline in sales
- Full or partial suspension in business
- Supply chain or distribution interruption
- Inability to access equipment
- Interrupted operations
- Reduction in operation hours
- Reduction in customer & client interaction
- Switching hours for sanitation reasons
- Faced decrease in providing services
If your business belongs to one of the following industries, you could qualify for credits:
- Education – colleges and universities
- Non-Profit or tax-exempt organizations
- Hospitality and Retail
- Real Estate and Construction
Both essential and non-essential businesses are eligible for the payroll tax credit. All businesses were forced to adapt to safety restrictions and even face a partial shut down due to the pandemic. The Employee Retention Tax Credit (ERC) is the government’s way to give back to businesses and essentially reward them for keeping employees on payroll, even if these employees were forced not to work.
What are qualified wages?
Qualifying wages are wages employers pay their employees. Group healthcare expenses count as qualified wages as well. For employers who qualify, ERC can be claimed against up to $10,000 per employee. Health plan expenses are included in this number per employee. Employers who have received loan forgiveness under the Paycheck Protection Program are still considered eligible employers. Credit can also be claimed against 50% of qualified wages paid.
What is a recovery startup business?
ERC cannot be claimed for the fourth quarter of 2021, except if a business is deemed as a “recovery startup business”.
For employer to be deemed as a recovery startup business, they must:
1) Not have been an eligible employer due to a decline in gross receipts or suspension of operations
2) Average gross receipts that do not exceed $1 million within the taxable year
3) Must have began carrying on business or commerce after February 15, 2020
If a business meets the above requirements, they can claim ERC for the third or fourth calendar quarter. Recovery startup businesses originally had a due date of January 1, 2022 to file for ERC – but, if you are not a recovery startup business, do not panic.
How does it work?
ERC is important because it can be responsible for increasing the chances of success for large organizations, small businesses and startups alike. If you are an eligible employer, filing for Employee Retention Credit can offset or eliminate payroll taxes and is currently one of the largest refunds businesses can get. Keep in mind that once filed, it can take up to nine months to receive your credit.
The statute of limitations for the ERC in 2020 and 2021 do not close until April 15, 2024 and April 15, 2025 respectfully. If your business is eligible for stimulus credit, you have until the deadlines to file. However, knowing the timeliness it can take to receive credits, it is wiser to file as soon as possible. You can file by reducing your payroll taxes sent to the Internal Revenue Service (IRS).
A common question around ERC is if it needs to be paid back. To answer, ERC does not have to be paid back as it is not a loan. However, you cannot take ERC into income when you receive it. You must instead reduce deductions for wages on your income tax return.
Did you know that 99% of businesses are small to medium sized companies? Smaller companies have different benefits of ERC than larger companies. Small employers can include wages paid by all employees while larger companies can only include those who were not performing work services.
Why is working with us the best way to file for ERC?
Hopefully now you can confidently say you are more familiar with ERC. But, if you are not very familiar with how to file for Employee Retention Credit, you’re in good hands with Stenson Tamaddon. We can determine if you meet the requirements to qualify for ERC, help you fill out a Form 941X based on your employer’s quarterly federal tax return, and even file for an advance payment on your credit. Our job is to maximize the credit you receive and minimize any risks that come with it.
It’s no secret that there are a lot of logistics that go into filing for your business’ ERC. That’s where we come in. We handle finance on a regular basis, so let us be the experts and we’ll make sure your business receives the maximum credit. We can help uncover all funding opportunities your business qualifies for, get a quote for your claim, and begin filing for your credit.
Here at Stenson Tamaddon, we pride ourselves on having assisted many businesses, both large and small, in filing for the Employee Retention Credit. We have experience collaborating with business owners to ensure they receive maximum credit for each calendar year. It’s safe to say that we are confident in what we do and would be proud to be your ERC partner.
- The ERC is a fully refundable tax credit that was set up by the government as a result of the COVID-19 pandemic.
- Though the ERC program officially concluded at the end of November 2021, you can still file.
- Your business can earn back between $5,000-26,000 per employee from 2020 and 2021.
- If your business suffered within the last few years during the pandemic, you most-likely will qualify to file.
- Notice that the ERC is a payroll tax credit, not an income tax credit. Therefore, it must be reported on Form 941.
- We assist you with forms like these to help ensure your information is accurately filled out and would be happy to set up group meetings to guarantee total transparency during this process while providing filing guidance for your business.
Finally, partnering with us can save you time and effort when filing your ERC. Whether it be finding if your business is eligible for ERC or filing for advance payment of employer credits and R&D tax credits, we’re here to walk you through the whole process and ensure that your statement is accurate.
Contact us to get started and file for the Employee Retention Credit.